Date of Award

Spring 5-17-2010

Degree Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Graduate Group

Economics

First Advisor

Felix Kubler

Second Advisor

Dirk Krueger

Third Advisor

Andrew Postlewaite

Abstract

General financial models have become workhorse models in the fields of macroeconomics and finance. These models have been developed and extensively studied by general equilibrium theorists. What makes them so applicable for macroeconomics and finance is the well accepted fact that models with a representative agent and without financial frictions yield equilibrium outcomes that are inconsistent with the empirical realities of financial markets. The general financial models are characterized by two main features: heterogeneous agents and financial frictions. The ability of these models to be applied in the fields of macroeconomics and finance in the future depends upon the frontier research in general equilibrium today. Over the past 20 years, research in general equilibrium has predominantly focused on a single friction: incomplete financial markets. The papers contained in this dissertation will analyze the equilibrium effects, both positive and normative, of two seldom researched frictions: bankruptcy and transaction costs. It is the hope that by studying financial frictions in isolation, we may learn which frictions have the greatest effect on welfare, which frictions are most able to be controlled by the government, and how to satisfactorily analyze the equilibrium of a process that is concurrently being restrained by several frictions.